Court Ruling Highlights The Importance Of Fee Protection For Safeguarding Small Businesses.

Why is it important for small businesses to protect themselves from the apparent drive by HMRC to target suspected tax evaders?

Well, because those small firms who are targeted by the Revenue for an investigation or simply a random enquiry cannot recover their legal and accountancy fees from HMRC even if they successfully defend themselves. Many smaller companies fear the rising costs of these protracted cases could ultimately put them out of business. However, there is a solution, and that’s fee protection. Fee protection cover can literally mean the difference between a business defending itself and surviving, or conceding defeat and folding, as the recent case of AD and J foster V HMRC, [2011} UKFTT 469 (TC01319) clearly demonstrated.

Danielle Forster was a sleeping partner in a VAT-registered farming business with her husband and son.

However she also ran her own small bed and breakfast business from the family’s farmhouse. The B&B business traded under the VAT registration threshold, but an HMRC officer attempted to enforce the charging of VAT on the side-line business. The officer demanded that Mrs Forster’s B&B should be included under the VAT registration ‘umbrella’ of the farm, in spite of her claims that having to pay the tax would inevitably lead to the closure of her small business. Fortunately the Judge ultimately ruled in her favour because he was “reasonably satisfied that there was an artificial separation of the farming and B&B business”.

“HMRC should never have taken the case this far and defend what proved to be indefensible. It also shows that HMRC can push small businesses to tribunals; even when it is unlikely to win.”

“One of the keys to this success was that Mr and Mrs Forster had taken out fee protection cover through their accountants. This covered all their legal fees and without it, it is unlikely that they would have fought the case, especially as costs cannot be recovered from HMRC, even after an appeal has been won,” he added.

So what is fee protection cover and why is it so important?

Fee protection cover is intended to cover the professional fees incurred with fighting a case with HMRC. The level of protection will vary with each policy but is typically capped at £50,000 or £100,000. This figure could include any fees charged by the accountant dealing with the case or the defence team, but not any tax assessment, penalties or interest. Why is fee protection so important? Well, even if you successfully defend a case like Mrs Forster, you still cannot recover your legal and accountancy fees from HMRC.